Summary
The One Big Beautiful Bill introduces a new tax deduction for car loan interest, available from 2025 through 2028. For qualifying individual buyers, up to $10,000 in annual interest on new vehicle loans may be deductible—even without itemizing. However, the deduction excludes commercial vehicles, fleet sales, leases, and vehicles not assembled in the U.S. It also includes income-based phaseouts. For dealerships, this provision—alongside the permanent 100% bonus depreciation and increased Section 179 expensing for certain business vehicles—opens the door to selling the tax benefits of your inventory more strategically. Understanding which customers and vehicles qualify, and how to frame these benefits during the sales process, can help dealerships turn tax law into a competitive advantage.
Contents
- Overview of the Car Loan Interest Deduction
- Which Vehicles Qualify?
- Income Limits and Phaseouts
- Why It Matters That the Deduction Is “Above the Line”
- Tax Incentives for Business-Use Vehicles
- Implications for Dealerships
- The Road Ahead
Overview of the Car Loan Interest Deduction
A key consumer-focused provision of the One Big Beautiful Bill (OBBB) is a new deduction for interest paid on certain car loans. This deduction applies to tax years 2025 through 2028 and is designed to support personal vehicle ownership by reducing the cost of financing.
The deduction allows eligible taxpayers to write off up to $10,000 in interest paid or accrued annually on a qualified car loan. Unlike typical interest deductions, this one doesn’t require the taxpayer to itemize—it’s classified as an “above-the-line” deduction, meaning it directly reduces taxable income for anyone who qualifies.
But the deduction isn’t universal. It comes with specific requirements for both the buyer and the vehicle.
Which Vehicles Qualify?
Only new, U.S.-assembled passenger vehicles purchased for personal use are eligible. The law defines an “applicable passenger vehicle” with several specific criteria:
- The vehicle’s original use must begin with the taxpayer—it must be new, not used or leased.
- It must be made for use on public roads, with at least two wheels.
- It must be classified as a car, minivan, SUV, pickup truck, van, or motorcycle.
- It must have a gross vehicle weight rating (GVWR) of less than 14,000 pounds.
- It must undergo final assembly in the United States.
Final assembly is determined using the vehicle identification number (VIN). Specifically:
- The first character of the VIN shows country of origin. VINs starting with 1, 4, or 5 indicate U.S. assembly.
- The 11th character refers to the specific assembly plant, which can be decoded based on manufacturer records.
Vehicles That Do Not Qualify
The deduction is limited to individual buyers. The following are excluded:
- Fleet vehicles
- Commercial-use vehicles
- Leased vehicles
- Vehicles with salvage titles
- Vehicles bought for scrap or parts
Income Limits and Phaseouts
The deduction phases out for high-income taxpayers. The phaseout is based on modified adjusted gross income (MAGI) and applies as follows:
- For single, head of household, and married filing separately filers, the deduction begins to phase out at $100,000 MAGI and is fully phased out at $150,000.
- For married taxpayers filing jointly, the phaseout starts at $200,000 and ends at $250,000.
The deduction is reduced by $200 for every $1,000 that MAGI exceeds the lower threshold. Taxpayers with MAGI above the upper limit are not eligible.
Why It Matters That the Deduction Is “Above the Line”
Unlike many deductions that only benefit taxpayers who itemize, this one is considered above the line, which means:
- It reduces adjusted gross income (AGI) directly.
- It is available to any taxpayer who qualifies, regardless of whether they itemize deductions.
- It can indirectly influence eligibility for other tax benefits that depend on AGI.
This makes the deduction more widely accessible—particularly for middle-income buyers who typically take the standard deduction.
Tax Incentives for Business-Use Vehicles
In addition to the personal-use interest deduction, the One Big Beautiful Bill reaffirms and expands several business tax benefits tied to vehicle purchases—offering dealerships a compelling reason to “sell the tax benefits of their inventory.”
100% Bonus Depreciation — Dealers can now promote that qualifying new and used business vehicles over 6,000 pounds GVWR may be eligible for 100% bonus depreciation through 2029. This means a business owner may write off the full cost of a qualifying vehicle in the year it’s placed in service.
Section 179 Expensing — For business buyers, Section 179 now allows up to $2.5 million in immediate expensing, with a phaseout starting at $4 million. Heavy SUVs (GVWR over 6,000 lbs) used more than 50% for business may qualify. This benefit is especially useful to contractors, self-employed professionals, and business owners looking to reduce their taxable income. There are certain restrictions for SUVs with a GVWR of 6,000 pounds but less than 14,000 pounds. Trucks and vans with a separate cargo area that is not accessible from the passenger area may qualify for a full 179 deduction.
Marketing Tip — Dealers should flag qualifying business-use vehicles in inventory and be ready to answer questions like:
- Is this truck over 6,000 lbs GVWR?
- Can this be claimed under Section 179 or bonus depreciation?
Even though dealerships cannot offer tax advice, highlighting that a buyer may be eligible for a first-year deduction of tens of thousands of dollars—with the buyer’s accountant confirming eligibility—can create urgency and close deals.
Implications for Dealerships
Whether selling to an individual or a small business owner, dealership teams now have multiple tax-related selling angles:
- For individual buyers:
- The personal-use car loan interest deduction (up to $10,000/year)
- For business-use buyers:
- 100% bonus depreciation for qualifying vehicles
- Up to $2.5 million in Section 179 expensing – potential limits based on type of vehicle purchased
- Continued regular depreciation benefits for non-qualifying vehicles
These provisions give sales and finance teams new opportunities to connect tax strategy to purchase behavior. Dealerships should:
- Educate sales teams on what qualifies. Understanding VINs, final assembly requirements, and vehicle weight can help prevent misinformation.
- Identify qualifying inventory in advance. Tagging or sorting new and used vehicles that meet the deduction criteria may help streamline the sales process.
- Use the deduction in marketing materials. Phrases like “Interest May Be Tax Deductible!” or “Qualifies for Federal Interest Deduction!” can resonate with value-conscious buyers.
- Encourage buyers to consult their tax advisor to confirm eligibility and maximize the benefit.
As interest rates remain elevated, the ability to deduct car loan interest—even with a cap—could significantly reduce the real cost of borrowing.
The Road Ahead
The One Big Beautiful Bill introduces a variety of new tax incentives that dealerships can use to drive interest and close more sales between 2025 and 2028. Whether promoting interest deductibility for personal buyers or large write-offs for business-use vehicles, dealerships have an opportunity to turn federal tax policy into a real-world sales advantage.
As with any tax provision, further IRS guidance will clarify documentation and eligibility rules. In the meantime, dealerships should prepare to answer customer questions and refer buyers to qualified tax professionals for guidance tailored to their circumstances.
Dalton Myers joined ARB as an intern in 2016 and became a manager in 2022. He specializes in providing tax services to auto dealerships, individuals, and private client service.
